1985 (4) TMI 284 - HC - Companies Law

Summary

Issues Involved:
1. Ultra vires transaction by the defendant company.
2. Lack of requisite resolution by the Board of Directors.
3. Execution of the promissory note.
4. Credit of dividends for subsequent installments.
5. Plaintiff's entitlement to interest.

Issue-wise Detailed Analysis:

1. Ultra Vires Transaction by the Defendant Company:
The defendant company contended that entering into a chit transaction was ultra vires the powers of the company as per the Companies Act I of 1956. The plaintiff argued that the Memorandum of Association (Clauses 14 and 24) authorized the company to borrow and raise money. The court held that the chit transaction amounted to borrowing or raising money, referencing several precedents that defined chit transactions as loans from a common fund. The court concluded that the transaction was within the powers of the defendant company as per its Memorandum of Association.

2. Lack of Requisite Resolution by the Board of Directors:
The defendant company argued that the transaction was ultra vires the powers of the Directors as there was no resolution passed by the Board of Directors as required by Section 292(1)(c) of the Companies Act and Article 35 of the Articles of Association. The court noted that the plaintiff could rely on the rule in Royal British Bank v. Turquand, which allows third parties to assume that internal management procedures have been properly followed. The court further observed that the company had benefited from the transaction and had made payments towards the dues, which amounted to implied ratification of the transaction.

3. Execution of the Promissory Note:
The defendant company contended that the promissory note was not executed in the name of or on behalf of the company. The court held that the suit was based on the chit transaction itself and not solely on the promissory note, which was taken as collateral security. Therefore, the plaintiff's claim could not be dismissed on the basis that the promissory note did not explicitly state it was executed on behalf of the company.

4. Credit of Dividends for Subsequent Installments:
The defendant company argued that it should have been given credit for dividends for installments due after the eighth installment. The court held that a defaulting subscriber could not insist on the payment of dividends as the obligations under the chit transaction were mutual. The court applied the principle that a party in default cannot insist on the performance of the other party's obligations under the agreement.

5. Plaintiff's Entitlement to Interest:
The plaintiff filed a memorandum of cross-objections regarding the disallowance of interest from 15.4.1974. The court held that as per Clause 11 of the chit agreement, the plaintiff was entitled to interest at 12% per annum from the date of the first default (15.4.1974) until the date of the suit, with due credit given to amounts paid. The plaintiff was also entitled to interest on the principal at 6% per annum from the date of the suit until realization.

Conclusion:
The appeal by the defendant company was dismissed, and the memorandum of cross-objections filed by the plaintiff was allowed in terms of interest entitlement. The decree of the lower court was modified accordingly, and the plaintiff was awarded costs, except for the costs in the memorandum of cross-objections.